CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties
A portfolio manager holds three bonds with market values of 40%, 35% and 25% of the portfolio and modified durations of 4.0, 6.0 and 10.0, respectively. The portfolio modified duration is closest to:
The portfolio modified duration is about 6.2. It is the weighted average of the individual durations using market-value weights: 0.40 x 4.0 plus 0.35 x 6.0 plus 0.25 x 10.0. The simple average of 6.7 is wrong because it ignores the portfolio weights.
- A5.0
- B6.2Correct
- C6.7
Explanation
The portfolio duration is the market-value-weighted average of the bond durations: 0.40 x 4.0 + 0.35 x 6.0 + 0.25 x 10.0 = 1.6 + 2.1 + 2.5 = 6.2. A simple average of 6.67 ignores the weights and is wrong.
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